Pound Sterling Tracks Latest Oil Price Rise

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The British pound is softer against the dollar but firm against the euro amidst a deterioration in investor sentiment following fresh attacks on Middle East oil and gas infrastructure.

The Brent crude oil price spiked to $105/bbl on Tuesday following Iranian attacks on oil and gas installations, triggering a dour tone on global markets.

The Majnoon oil field in southern Iraq was targeted by an attack and operations were suspended at the Shah natural gas field in the United Arab Emirates after a drone attack sparked a massive blaze.

The UAE's Fujairah terminal has meanwhile resumed partial operations after a drone attack at the weekend.

"Markets this morning apparently see the glass again a bit more half empty rather than half full, with headlines this morning focusing on Iran targeting oil production facilities in the region while the US also threatens to attack key Irian Kharg oil infrastructure," says KBC Markets in a daily brief.

Rising energy prices have lifted expectations for higher inflation rates across the world, with investors judging that the UK will be particularly vulnerable as the country enters this new phase with elevated inflation levels relative to elsewhere.

This has pushed up domestic bond yields and interest rate products, which have, for now at least, been supportive of the pound against most peers.

The GBP/EUR pair rose to the cusp of 1.16 last week but is hovering just below here on Tuesday. "What looked like 50bp of cuts priced for the year has flipped into roughly 17bp of hikes, with traders treating the BoE as one of the most responsive central banks to renewed inflationary pressure. This has helped GBP/EUR climb towards €1.16 - up over 1.4% this month," says George Vessey, Senior FX Analyst at Convera.

The GBP/USD pair remains under pressure amid strong USD demand during the crisis and is trading at 1.3305.

Above: GBP/USD at daily intervals.

Iran is attacking regional facilities to ensure global oil and gas supplies remain tight enough to increase prices and bring pressure to bear on the U.S. to end its military campaign.

The U.S. President, Donald Trump, made fresh calls for other countries to join the U.S. in securing the Strait of Hormuz as fears of global fuel rationing grew.

"While the U.S. is now seemingly looking for an off-ramp, it will be difficult for the U.S. alone to end this war as the U.S. president does not control all the forces that have been unleashed. As we have seen in Ukraine, despite Trump’s efforts, it is not easy to end wars," says Alessia Berardi, Head of Global Macroeconomics, Amundi Investment Institute.

Monday saw a relatively calm session on global markets as investors let hope get the better of them.

Above: GBP/EUR settles just below the 1.16 level.

The euro and pound recovered against the dollar but slipped back against high-beta currencies that tend to benefit when sentiment is improving.

Helping sentiment was news that two Indian-owned tankers carrying liquefied petroleum gas are heading to India after crossing the Strait of Hormuz, leading to expectations that some special carveouts for Iran's allies, such as India and China, would at least ease some of the congestion.

Should the situation ease more, then expect the USD to slip, while GBP should also retreat from its highs against the EUR.

However, all signs point to no immediate break in hostilities, and President Trump might delay trying to secure the Strait of Hormuz in protest of a lack of support from European and global allies.

Iran has some leverage over the U.S. over energy, but the U.S. is a net energy exporter and could use the crisis to pressure Europe and China to contribute assets. After all, a long-running Trumpian theme is the desire to get NATO allies to spend more, meaning this crisis presents him with new opportunities.

This means conditions remain supportive of GBP/USD downside and GBP/EUR upside.